The Private Sector and International Development: A Love Affair, or Cold Feet?

The private sector is a crucial partner in advancing sustainable development, and bilateral aid agencies are grappling with ways to learn from and leverage the activities of companies and markets. As the worlds of business and of aid increasingly intersect—and as development budgets are reined in even as demands on them grow—the pressure is to do more in partnership with the private sector. The real challenge, though, is to do better.

This was the headline message from a recent roundtable discussion with representatives from nine bilateral donor agencies and invitees from the private sector, co-organized by WRI and the International Institute for Environment and Development (IIED) in London (see notes from the roundtable).

Both sides desire a strengthened relationship. Donor agencies see the private sector as an indispensable partner for improving the effectiveness and efficiency of aid. Agencies are looking for important sources of ideas, technology, and financing to scale up development solutions.

One example is the Africa Enterprise Challenge Fund (AECF), which is funded by the Australian, British, Danish, Dutch, and Swedish aid agencies. AECF is improving livelihoods of poor people in rural Africa by supporting innovation and new business models to help small-scale farmers adapt to climate change and promote investment in the generation of low-cost, clean, renewable energy.

Private sector actors seek clearer policy signals and more consistent support from donor agencies, particularly in understanding and navigating local politics. They also seek opportunities to develop new products and new markets, benefiting from the “de-risking” role that the public sector can play.
Many shared interests--like improving the business climate in developing countries, extending service delivery, and including the four billion people at the base of the world’s income pyramid into the global economy --are already being advanced through closer partnership. For example, the French development agency (AFD) partnered with small, private operators to deliver universal access to water services in Ho Chi Minh City, Vietnam (more here).

A Complicated Relationship

The relationship between donor agencies and the private sector is complicated, however. Despite attendant benefits of improved collaboration, private sector actors are often discouraged by the high transaction costs of doing business with agencies that tend to have longer time horizons.

The private sector is also extremely diverse. Working with big multinationals, investors, small- and medium-sized enterprises (SMEs), and the informal sector requires very different tools and approaches for successful partnerships.

And aid itself is changing: Overseas Development Assistance (ODA) from traditional “developed” countries comprises a shrinking part of developing countries’ overall financial flows. In its place is funding from new players such as private foundations and businesses. This shifting landscape gives rise to questions about the future of development finance “beyond ODA”.

3 Main Hurdles to Effective Collaboration

Participants in the WRI/IIED roundtable shared a strong sense that the time has come for a step-change in donor-private sector collaboration. Although public-private initiatives have increased over the past decade, these have tended to be piecemeal, scattered, and oriented towards maintaining the status quo (see here and here for recent overviews of leading donor agencies’ engagement with the private-sector).

There was broad consensus in the roundtable that advancing sustainable development in the context of growing resource scarcities and climate change requires an economic transformation of the kind that can only be delivered in close partnership with the private sector. A partnership built on the ambition of transforming economies must embrace greater risk and uncertainty and be guided by a clear, shared vision of success.

So what is holding back progress? Participants identified three main hurdles:

A lack of mutual understanding between donors and the private sector, arising from the two “sides” speaking different languages, being motivated by different “bottom-lines,” and having different strategic and operational drivers and concerns. In addition, mismatched mutual expectations can breed mistrust, particularly when challenges arise.

A dearth of analysis and evidence to inform better donor-private sector collaboration. There is limited knowledge of what is happening (in terms of current activities and impacts), what is working, what isn’t, and why. As a result, donors are ill-equipped to responsibly and transparently handle the growth in these kinds of collaborations.

The risk-aversion of donors stemming from limited experience and capabilities in handling uncertainty. The tension between donor agencies’ ambition in scaling up collaboration with the private sector and their increasingly stringent results and accountability frameworks unwittingly act to constrain ambition and risk-taking.

Looking Ahead: Scaling Up Collaboration

To overcome the hurdles discussed at the roundtable, participants suggested four key priorities:

Better evidence of what works and what doesn’t in marrying commercial and sustainable development success;

Clearer, more standardized metrics to capture the impact, benefits, and “value-for-money” of donor-private sector collaborations, and to track progress in delivering on desired outcomes; and

Space and resources for innovation, risk-taking, and experimentation.

There are good prospects for the relationship between bilateral development agencies and private sector actors to further flourish. The shaping of a post-2015 development agenda provides one important opportunity to promote action-oriented partnerships and to scale up and improve successful donor-private sector collaborations.

WRI and IIED are working together to flesh out a program of work to support a more ambitious partnership between donor agencies and the private sector. We welcome your ideas!